Economics

Blog posts from March 2011

Australia's house prices

IT PAYS to pick your drinking buddies carefully. It's nice if they enjoy a pint as much as you do. But if they hold their liquor too well, you may wake up regretting trying to keep up with them.

In the years before the financial crisis, Australia's economy set a hard, fast pace for the rest of the Anglo-Saxon world. Its house prices rose faster than Britain's or America's (although Ireland's outstripped them all) and its current-account deficit gaped wider for longer. But its economy proved strong-livered. House prices fell from March 2008 to March 2009 (as measured by the weighted average of the eight state capitals), then resumed their rise.

Migration trends

WHEN analysing markets, it's important to remember that there is both a supply side and a demand side. Economists know this. But sometimes they forget. Wendell Cox (who is not an economist) could be forgiven for forgetting about the supply side, but Richard Green should know better. The issue is this: Mr Cox looks at the Census 2010 data and reports population growth rates for a handful of central cities relative to their suburbs. Since 2000, he says, suburbs have generally grown faster, and this indicates that the "Back to the City" movement isn't real. Mr Green takes him at his word and writes:

I have long rooted for cities (although I confess that I myself live in an "urban" suburb).

Business

NOT long ago, I had occasion to visit a small, independent hardware store in the Washington neighbourhood I used to call home. While checking out, I noticed a flyer taped to the counter, calling on local residents to oppose the planned opening of four Wal-Mart stores around Washington. I first found this perplexing; the store is less than a mile from a massive Home Depot (which I'd patronised earlier in the day); if big-box retail was going to kill the store, it would be dead already. But after reading an anti-Wal-Mart missive from another small business owner, I've been wondering: what message do these guys think they're sending?

Privatisation

In 1996, Congress passed the Helium Privatization Act, which directed the Secretary of the Interior to sell off the entire Helium Reserve by 2015. Of course, this was at a time when there were more uses for Helium than ever. But here's the problem: the price that the helium is being sold at in order to deplete the reserves by 2015 is incredibly below market. It's practically a liquidation sale. But the low prices are necessary in order to meet the Congressional directive to eliminate the helium reserve.

Industrial policy

[Former New Mexico Governor Bill] Richardson says that the film and TV subsidy has brought "nearly $4 billion into our economy over eight years" and has created 10,000 jobs. By "our," he means New Mexico. He says every state should emulate this success.

The joke, I'm sure I don't need to explain, is that not every state can succeed by poaching productions from other states, since what's made in one state can't be made in another. But that's not quite right. A subsidy allows a business to cut prices and artificially raise demand.

China's economy

The wave of Chinese money that has crashed through the markets for fine wine, art and antiques is now flooding into the altogether sleepier world of stamp collecting.

At an auction in Hong Kong this week, a rare block of four stamps from the Cultural Revolution sold for HK$8,970,000 (US$1.1m) – an all-time record for a Chinese stamp or multiple. Including a 15 per cent buyer's fee, the anonymous buyer paid over US$1.3m for the stamps.

Inflation

THE Federal Reserve looks at a lot of different data points when considering the economy's rate of inflation, but its preferred measure is a core measure, which strips out the volatile energy and food components. Other central banks, including the European Central Bank, prefer to focus on headline inflation. This is understandable; people pay for the volatile components just as they pay for the core components. But making policy around headline numbers may add to instability in some cases.

In the summer of 2008, for instance, rising oil prices caused headline consumer prices in America to soar.

Fiscal policy

LAST week, many of us quoted stories on a new Goldman Sachs analysis of proposed Republican spending cuts. House Republicans, recall, want to slash spending in the current fiscal year, which is half over, by $61 billion. A Goldman analysis by Alec Phillips suggested that this would cut growth this year by 2 percentage points. Chin scratching began when Fed Chairman Ben Bernanke said in testimony yesterday that this was an overstatement; the cuts would likely trim no more than a few tenths of a percentage point off of growth. How to explain the gap?

As it turns out, Goldman's analysis was misrepresented. They've since clarified:

Europe's economy

I WROTE yesterday that rising European inflation associated with increasing commodity prices may soon prompt a move by the European Central Bank. The ECB did not announce a rate increase today, but it did signal that one would be occuring soon—if not next month, then almost certainly in May:

European Central Bank President Jean-Claude Trichet said the ECB may raise interest rates next month to fight accelerating inflation pressures.

An “increase of interest rates in the next meeting is possible,” he told reporters in Frankfurt today after the central bank left its key rate at a record low of 1 percent.

Retail in India

IN THE weeks leading up to India's annual budget, a familiar scene plays out in the country's media. Financial pages and news channels are full of advice and wish lists from corporate executives, economists and the occasional "common man" on what they would like to see in the budget. This year was no different. But one sector in particular—global retailers such as Walmart and Tesco—had high hopes that the country would finally allow foreign investment into "multi brand retail stores" or supermarkets and department stores.

The European Central Bank's message

THE central banks of Britain and the euro area have held their policy rates at rock-bottom levels since March and May 2009 respectively. At some time they would have to come off the floor, but who would make the first move?

With consumer-price inflation at 4% in January, double the target 2% rate, and due to surge still higher in coming months, the Bank of England had seemed the most likely to take the lead. By contrast, euro-wide inflation was 2.4% in February, not that much above the target of "less than but close to 2%" set by the European Central Bank (ECB).